Pensions Institute calls for kite-mark system to help employers find
value-for-money pension schemes.

A kite-mark system should be introduced to help employers find value-for-money pension schemes, a report has recommended.

Pensions will be a "lottery" unless the Government, regulators and the industry ensure that all workers benefit from schemes offering good value relative to contributions paid, warned the report published by the Pensions Institute at Cass Business School.

It comes days after the Government's landmark initiative to automatically enrol up to 10 million people in workplace pensions was launched.

The Government scheme, started with larger firms and businesses, will gradually be enrolled in a staging process over the next six years.

The report argued that an "advice gap" for smaller employers has been created as an unintended consequence of auto enrolment, combined with the retail distribution review which will ban adviser sales commission on new schemes sold from January 1.

The introduction of a kite-mark code could help these smaller employers seek out schemes which represent best value for money, the report said.

Without such a code, there is real danger that millions of new pension investors could be brought into schemes which offer poor value in a "dysfunctional" market.

Professor David Blake, director of the Pensions Institute, said there is some time to tackle the problem as many smaller companies do not need to be prepared for auto enrolment until mid to late-2013.

"A clearly signposted kite-mark website for good quality value-for-money schemes, available to all employers irrespective of their size and employee profile, would facilitate fair and equal treatment for all private sector employees," he said.

More than half a million people will be newly saving into a workplace pension by Christmas under auto enrolment, according to Government estimates.

Savers will typically need to put aside just over £2 a week to get them started, according to Nest, a not-for-profit pension scheme set up under the new rules.

The report, titled Caveat Venditor, argues that auto enrolment should be governed by the principle of seller not buyer beware.

As employees are passively auto enrolled into schemes, they are "buying blind", it said.

Chris Daykin, trustee director of Now: Pensions, the sponsor of the research, said: "'Let the seller beware' puts the onus on the seller to ensure its product will do what it says on the tin: to produce a lifetime income in retirement that is fair value relative to the contributions paid."

Stephen Gay, Association of British Insurers (ABI) director of life, savings and pensions, said: "It is important that all workers taking advantage of automatic enrolment are enrolled into schemes that offer value for money.

"The good news is that the cost for managing pensions has fallen over the last 10 years, according to ABI research."

The ABI is working with regulators to ensure that charges are shown consistently to employees across all pension schemes to give greater transparency for workers who are automatically enrolled, he said.

Auto enrolment aims to tackle growing concerns about an old-age poverty crisis, as people live for longer but fail to put enough away for their later years.

Recent official figures show that the number of private sector workers paying into a pension is at its lowest since records began in 1953.

Last year 2.9 million private sector workers put money into schemes, the first time active membership dipped below three million.

Steve Webb, Minister for Pensions, said: "I am watching pension charges like a hawk. The creation of Nest has prompted new low-cost offers in the market, which is encouraging.

"But I am concerned about charges in legacy schemes and have challenged the industry to bring these into line with new business. I have the power to cap charges and will do so to protect consumers if I need to."